This paper examines the role of agent heterogeneity and learning on wage dispersion and employment dynamics. In the first half of the paper, I present an equilibrium matching model where heterogeneous workers and firms learn about match quality and bargain over wages. The model generalizes Jovanovic (1979) to the case of heterogeneous workers and firms. Equilibrium wage dispersion arises due to productivity differences across workers, technological differences across firms, and heterogeneity in beliefs about match quality. Under a simple CRS technology, the equilibrium wage is additively separable in worker- and firm-specific components, and in the posterior mean of beliefs about match quality. This parallels the 'person and firm effects' empirical specification of Abowd et. al. (1999, AKM) and others. It consequently provides a theoretical context for the AKM model, and a formal economic interpretation of their empirical person and firm effects. The model also yields an assortative matching result that predicts a negative correlation between estimated person and firm effects, which is consistent with most empirical evidence. Finally, the model makes novel predictions about the relationship between the person and firm effects and separation behavior, job duration, and firm size. In the second half of the paper, I test the model's empirical predictions. I estimate fixed and mixed effects specifications of the equilibrium wage function on the LEHD database. The mixed effect specifications generalize the earlier work of AKM and others. The learning component of the matching model implies a specific structure for the error covariance. I exploit this structure to test whether earnings residuals are consistent with Bayesian learning, and to estimate structural parameters of the matching model. I find considerable support for the matching model in these data.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by EconWPA in its series Labor and Demography with number
0511012.
Find related papers by JEL classification: J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
This paper has been announced in the following NEP Reports:
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Milton Harris & Bengt Holmstrom, 1981.
"A Theory of Wage Dynamics,"
Discussion Papers
488, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
[Downloadable!]
James Albrecht & Susan Vroman, 2002.
"A Matching Model with Endogenous Skill Requirements,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 283-305, February.
[Downloadable!] (restricted)
Other versions:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Woodcock, Simon, 2006.
"Match Effects,"
MPRA Paper
154, University Library of Munich, Germany.
[Downloadable!]
Other versions:
Simon D. Woodcock, 2007.
"Match Effects,"
Discussion Papers
dp07-13, Department of Economics, Simon Fraser University.
[Downloadable!]